Report of 2014 Loss Ratio Experience in the Individual and Small Employer

Markets for: Insurance Companies

Nonprofit Health Service Plan Corporations and

Health Maintenance Organizations

September, 2015

This document is made available electronically by the Minnesota Legislative Reference Library as part of an ongoing digital archiving project. http://www.leg.state.mn.us/lrl/lrl.asp

Table of Contents

Introduction.............................................................................. 1

Definition of Loss Ratio .......................................................... 2

Notes on Using the Results ................................................... .2

How Rates are Regulated ....................................................... 6

Individual, Small Group and Large Group Loss Ratios............................... ................................ .......... 9

Additional Reference Sources ................................... 10

Attachments 1, 2 and 3

Page 1

Introduction

Under Minnesota Statutes § 62A.021, subdivision 1(h), the Minnesota Departments of

Health and Commerce are required to issue a public report each year listing, by health plan

company, the actual loss ratios experienced in the individual and small employer markets

in the State of Minnesota. This report includes loss ratios for the calendar year ending

December 31, 2014, for health plan companies regulated by the Minnesota Departments

of Health and Commerce. There is a public interest in dissemination of information that

may help consumers choose from among available health plan companies.

The loss ratio is a measure of how much premium revenue collected by a health plan

company was spent on medical care. Revenue not used to pay medical expenses is used

for health plan administration, marketing, taxes, other expenses, and net income. However,

due to many reasons related to operation and measurement, loss ratios are not necessarily

an indicator of value for a specific health plan company in any one year.

State law establishes minimum loss ratios for small group and individual plans to ensure

a minimum value to the consumer. See pages six through eight for a description of the

requirements.

According to the 2013 Minnesota Health Access Survey conducted by the Health

Department, approximately 56 percent of Minnesota’s population received coverage

through an employer, while 5 percent of the population purchased individual coverage, and

approximately 31 percent of Minnesota's population received coverage through public

programs. The 2013 uninsured population in Minnesota was 8 percent.

Page 2

Definitions

Loss Ratio is the ratio of incurred claims to earned premiums. On their annual

Supplemental Health Care Exhibits, health plan companies reported total earned premium,

incurred claims, and loss ratio for the year ending December 31, 2014, by individual, small

employer, and large employer health plan markets in Minnesota.1 Loss ratio is often

referred to as the medical loss ratio, or “MLR.”

Notes on Using the Results

How to Use the Data

In order to use the loss ratio data for a specific purpose, it is important to find out additional

information relevant to that purpose.

For example, when the Commerce Department reviews health plan rates for compliance

with statutory requirements, we ask for additional information to evaluate the rates,

including:

how the loss ratio has been calculated

the benefits that will be offered

any recent changes in rates or benefits

national experience when Minnesota experience is not credible

an analysis of the relative newness of the experience

any other information that will help evaluate whether rates will meet the

statutory requirements

Unintentional Errors

The earned premiums, incurred claims, and loss ratios listed in this report have been

provided by the health plan companies. The loss ratios have not been independently

verified and may include unintentional errors.

1 Individual market includes individual policies that converted from group coverage and individual certificates

issued to members of associations; however, health plan companies offering only those policies are not included

in this report, because state loss ratio requirements do not apply to them.

Page 3

Loss Ratio is not the Same as Value

The loss ratio can be a good measure of relative value if two health plan companies are

very similar in the benefits they provide and other factors. In that case, the plan with the

higher loss ratio may provide better value to consumers.

Health plan companies differ in a variety of ways, however, and therefore the relative loss

ratio is not always indicative of relative value. For example, one health plan company may

not spend much effort preventing payment of fraudulent claims, while another may spend

much effort resulting in non-payment of many fraudulent claims. The first company would

have a higher loss ratio due to the fraudulent claims it paid but that would not be a value to

the honest policyholders. Similarly, one health plan company may pay doctors and hospitals

at a higher charge level than another, due to different contractual arrangements, but those

higher payments do not typically represent greater value to the policyholder.

Also, every prospective policyholder is different, with different health care needs. In order to

compare health plan companies, it is necessary to review other aspects of the company

affecting value, such as availability of particular medical care providers, quality of patient

service, and quality of care management.

Statistical Fluctuation

Loss ratios are subject to statistical fluctuation. Each individual’s health care costs and the

total incurred claims of a health plan company are more or less unpredictable. Having a

high or low loss ratio may be due to fluctuations and may not be repeated in a future time

period.

Recent Changes

Any change that has been made in a health plan company’s business since the beginning of

the reporting period also affects the loss ratio. For example, rate levels or benefits offered

may have changed significantly due to legislative requirements, newly effective Affordable

Care Act (ACA) plan design and coverage requirements, or plan changes made voluntarily by

the health plan company.

Guaranteed Coverage

Prior to 2014, newer policies typically had lower levels of claims than policies that had been

in force for more time due to health plan companies’ ability to refuse to cover prospective

policyholders who had a high expectation of claims. Effective January 1, 2014, the ACA

required health plan companies to offer coverage to all individual and group applicants

within the open enrollment period. The individual market’s recent high loss ratios, as shown

in Attachment 1, are primarily a result of this new ACA-guaranteed coverage rule.

Page 4

Transfers from MCHA

Prior to 2014, Minnesotans with pre-existing conditions could be refused coverage by a

health care company. Those individuals could access health coverage through the

Minnesota Comprehensive Health Association (MCHA). At the start of the ACA in 2014,

approximately 70 percent of MCHA policyholders transitioned their coverage to the

individual market. Most health care companies assumed that only 30 to 40 percent of

policyholders would transfer from MCHA to the individual market during the year. The high

loss ratios shown in Attachment 1 are partially attributable to the higher claims costs of

individuals who unexpectedly transferred more quickly than anticipated from MCHA to the

individual market in 2014. This factor is closely connected to the guaranteed coverage topic

discussed above.

New Benefits

Starting in 2014, the ACA required additional mandatory benefits for individual health care

policies for the first time. While the small group market had to adopt these additional

benefits as well, those policies generally already provided comprehensive coverage and

were largely unaffected. Some of these newly required benefits include maternity,

pharmacy, mental health, and substance abuse coverage. These additional benefits

increased health plan companies’ incurred claims. These additions may have increased the

loss ratio, because these benefits were previously available to fewer policyholders.

Federal Risk Mitigation Programs

Due to ACA requirements, on and after of January 1, 2014, health plan companies may no

longer deny coverage or charge higher premiums based on the health of the policyholder.

This core tenant of the ACA allows consumers to purchase health care coverage, even with

pre-existing conditions. Programs and regulations enforced by Commerce exist to prevent

health plan companies from discriminating against sicker enrollees. Because of the new

health care laws, health plan companies faced uncertainty about how to price new

coverages for new purchasers in 2014. To protect consumers, the ACA established three

programs: risk adjustment, reinsurance, and risk corridors (3Rs). The overall goal of these

three programs is to provide more certainty, to promote competition, and to stabilize

premiums. These three programs affect the earned premium and incurred claims amounts

shown on Attachment 1. The loss ratio on Attachment 1 may be affected by additional

income and expense items due to these three new programs. These programs are described

in further detail below.

Risk Adjustment Program

The risk adjustment program is the only permanent federal health care risk mitigation

program. Prior to 2014, health plan companies in the individual and small group markets

were concerned with the overall claims levels of only their own risk pool. The risk adjustment

program provides payments to health plan companies that disproportionately attract higher-

risk policyholders (such as individuals with chronic conditions). The program transfers funds

from health plan companies with relatively lower risk enrollees to health plan companies

with relatively higher risk enrollees, similar to the basic premise of insurance of pooling risk.

The goal of the risk adjustment program is to encourage health plan companies to compete

Page 5

based on the value and efficiency of their plans, rather than by attracting healthier

enrollees. This also helps protect certain health plan companies from adverse selection.

Temporary Reinsurance Program

The goal of the ACA’s temporary reinsurance program is to stabilize individual market

premiums during the early years of new market reforms. This program will be in place from

2014 through 2016. The program transfers funds from nearly all the health insurance

markets to the individual market. Health plan companies in the individual market receive

highly-subsidized reinsurance support for their highest cost policyholders.

Temporary Risk Corridors Program

The ACA’s temporary risk corridors program also runs from 2014 through 2016 and is

intended to discourage health plan companies from setting high premiums in response to

uncertainty about who will enroll and what they will cost. The program is intended to reduce

extreme gains and losses for the health plan companies. The risk corridors program sets a

target of approximately 80 percent of premium dollars for exchange health plan companies

to spend on health care claims and quality improvement. Health plan companies with claims

less than 3 percent of the target amount must pay into the risk corridors program. The funds

collected will be used to reimburse health plan companies with claims that exceed 3

percent of the target amount.

Page 6

Rates Regulation in Minnesota

Minnesota Statutes § 62A.02, requires all health plan rates to be approved by the

Commissioner of Commerce or the Commissioner of Health before being used. Minnesota

has an effective rate review process, which means a health plan company must supply

actuarial justification and data demonstrating that the benefits are reasonable in relation to

the premiums. The Department of Commerce reviews all rates to verify reasonableness

and compliance with state and federal law. Rate restrictions for individual plans are

specified in Minnesota Statutes § 62A.65 and small employer plans are specified in

Minnesota Statutes § 62L.08.

Federal Medical Loss Ratio as defined by the Patient Protection and Affordable Care Act

The ACA was passed by Congress and signed into law on March 23, 2010. The ACA

requirements for medical loss ratios are provided under Section 2718 of the ACA. More

detailed information regarding these requirements may be found in the Code of Federal

Regulations Title 45, Part 158. Note that the calculation of the medical loss ratio is slightly

different than the state loss ratio described below.

A national leader, Minnesota has had Medical Loss Ratio requirements for more than 20

years. Starting in calendar year 2011, the federal government required that an insurer

that does not spend enough of its premium dollars on health care must provide a rebate

paid in 2012 to the insured individual or to the policyholder, which may be the employer

that purchased the insurance.

Under the ACA, an insurer’s MLR is the ratio of the issuer’s payments for medical services

and activities that improve health care quality to premium revenue (minus the issuer’s

federal and state taxes, licensing, and regulatory fees). In other words, a medical loss ratio

is the amount of health insurance premiums that an insurer spends on health care and

activities to improve health care quality, as opposed to profits and administrative costs,

including executive salaries, overhead, and marketing. Like Minnesota’s loss ratio, it is

expressed as a percentage: A medical loss ratio of 90 percent means nine out of 10 of all

premium dollars that the insurer receives are spent on health care and quality

improvement, with the other dollar spent on overhead, profits, and administrative costs.

Under the ACA requirements, insurers must provide a rebate to consumers if the MLR is

less than 85 percent in the large group market and 80 percent in the small group and

individual markets. This rule does not apply to employers who operate a self-insured plan.

In addition, the experience of very small insurers with less than 1,000 people enrolled

cannot sufficiently confirm that they have or have not met the medical loss ratio standard,

and as a result those insurers are deemed non-credible and are not required to provide

rebates. An insurer with 1,000 to 75,000 people enrolled is considered to have partially-

credible experience and a “credibility adjustment” is applied to its medical loss ratio under

the ACA.

Page 7

The amount of rebate to each enrollee is the total amount of premium revenue received by

the issuer from the enrollee (after subtracting Federal and State taxes, licensing, and

regulatory fees), multiplied by the difference between the medical loss ratio required by ACA

and the issuer’s medical loss ratio, subject to the applicable credibility adjustment.

Effective January 1, 2011, health plan companies must report medical loss ratios for all fully

insured plans to the Secretary of the U.S. Department of Health and Human Services (HHS).

A “Plan Year” is defined as the calendar year. The first report, covering calendar year 2011,

was filed on June 1, 2012. Insurers were required to make the first round of rebates to

consumers in 2012. Starting in the summer of 2012, HHS posted insurers' reports and

medical loss ratios online at http://www.cms.gov/apps/mlr/mlr-search.aspx.

The Centers for Consumer Information and Insurance Oversight (CCIIO) is responsible for

enforcement of the ACA’s Medical Loss Ratio reporting and rebate requirements. After

working with the National Association of Insurance Commissioners (NAIC) on procedures for

the MLR audit program, CCIIO has begun examinations nationally.

Medical Loss Ratio as Defined by Minnesota Law

Individual states may require a higher minimum loss ratio for insurers operating within their

state and may calculate the loss ratio differently from the ACA definition. Minnesota law

requires that individual, small employer, and large employer health plan rates meet the

specific minimum loss ratio standards in Minnesota Statutes § 62A.021.

Minnesota’s loss ratio is defined as incurred claims divided by earned premium, which is

different from the ACA MLR calculation. Minnesota law requires that small employer group

plans have rates that are expected to achieve a minimum loss ratio of 71 percent to 82

percent, and that individual plans have rates that are expected to achieve a minimum loss

ratio of 68 percent to 72 percent for health maintenance organizations and nonprofit health

service plan corporations (HMOs).

HMOs and nonprofit health service plan corporations have different minimum loss ratios

based on whether they are assessed less than three percent of the total annual amount

assessed by the Minnesota Comprehensive Health Association. Companies assessed at less

than three percent of the total annual MCHA assessment must only reach a 68 percent

minimum loss ratio because the smaller an entity is, the less reliable their data is and the

more financial risk they are taking on due to random statistical variations in claims. The state

ratio is only actuarial in nature (that is, only prospective) and Commerce reviews Actuarial

Memorandums and past loss ratio experience for demonstrations of compliance.

The federal minimum loss ratio standard has a similar safeguard. Specifically, the new ACA

rules have “credibility adjustments” to take into account that carriers with lower enrollment

are far more at risk for the effect of random statistical variation.

Unlike Minnesota’s pre-existing state loss ratio standard, which is prospective, the federal

loss ratio standard is retrospective in nature and carries with it rebates to customers if the

Page 8

minimum loss ratios are not met in each marketplace.

Individual coverage:

• 72 percent for companies assessed three percent or more of the total annual

MCHA assessment

• 68 percent for companies assessed less than three percent of the total annual

MCHA assessment

Small employer coverage:

• 82 percent for companies assessed three percent or more of the total annual

MCHA assessment

• 71 percent for companies assessed less than three percent of the total annual

MCHA assessment, on their policies with fewer than 10 employees

• 75 percent for companies assessed less than three percent of the total annual

MCHA assessment, on their policies with 10 or more employees

For insurance companies, Minnesota law requires that large group plans, small employer

group plans, and individual plans have rates that are set to achieve a minimum loss ratio of

60 percent. For insurance companies (including affiliates) that are assessed 10 percent or

more of the total annual MCHA assessment, the loss ratio standards used are the same as

those used for health maintenance organizations and nonprofit health service plan

corporations.

Page 9

Individual, Small Group and Large Group Loss Ratios

The loss ratios shown on Attachments 1 through 3 under the column titled State Loss Ratio

are based on the state definition of loss ratio. The column titled Preliminary ACA MLR gives

the preliminary estimate of the ACA loss ratio from the health plan company’s annual

statement, as shown in the Supplemental Health Care Exhibit. Domicile as shown on

Attachments 1 through 3 refers to the state in which the health plan company was first

licensed and the state that has the primary regulatory responsibility.

Page 10

Additional Reference Sources

For information about insurance companies and nonprofit health service plan corporations,

please contact the Commerce Department at:

Minnesota Department of Commerce Insurance Division 85 Seventh Place East, Suite 500

St Paul, MN 55101-2198

(651) 539-1600; (800) 657-3602

mn.gov/commerce/insurance

For information about health maintenance organizations, please contact the Health

Department at:

Minnesota Department of Health Managed Care Systems Section 85 Seventh Place East P.O. Box 64882

St. Paul, MN 55164-0882

(651) 201-5100; (800) 657-3916

www.health.state.mn.us/hmo

Attachment 1*

Individual Market (not including health plan companies offering only Association or Conversion Policies) Supplemental Health Care Exhibit for 2014

State Preliminary

Group NAIC

Earned Incurred Loss ACA Covered

Code Number Name Domicile Premium Claims Ratio MLR Lives

461 55026 BCBSM Inc MN 555,513,106 580,843,644 105% 123% 154,881

3492 11817 PreferredOne Ins Co MN 269,311,391 253,583,929 94% 111% 77,464

1552 12459 Medica Ins Co MN 50,531,905 60,604,746 120% 129% 20,213

1258 44547 HealthPartners Ins Co MN 46,430,000 44,536,000 96% 107% 20,229

19 69477 Time Ins Co WI 36,552,897 24,093,371 66% 94% 9,783

1258 52628 Group Health Plan Inc MN 12,753,000 14,026,000 110% 117% 4,548

1552 95232 Medica Health Plans of WI WI 10,935,291 9,133,605 84% 108% 3,081

1258 95766 HealthPartners Inc MN 9,449,000 11,189,000 118% 126% 1,676

4380 52629 UCare MN MN 2,464,136 3,893,947 158% 106% 557

1552 52626 Medica Health Plans MN 2,453,132 4,134,359 169% 176% 196

19 65080 John Alden Life Ins Co WI 1,856,041 1,479,391 80% 97% 567

707 62286 Golden Rule Ins Co IN 1,025,705 1,186,087 116% 112% 186

Total

$999,275,604 $1,008,704,079 101% N/A $293,381

*Attachment 1 lists the loss ratios experienced in the individual health plan market in 2014 by companies that cover individuals in that market.

Not all health plan companies with individual health plans in force are included, as some had premium volume lower than $300,000, which were

not included.

The state loss ratios for 2014 ranged from 66% to 169%. The total state loss ratio for 2014 is 101%. The total state loss ratio for the previous year

was 82%.

Values for the ACA MLR are marked above as preliminary because, due to the late timing of the 3Rs processing, carriers were forced to estimate

financial entries for each of the 3R programs.

Attachment 2**

Small Employer Group Supplemental Health Care Exhibit for 2014

State Preliminary

Group NAIC

Premium Incurred Loss ACA Covered

Code Number Name Domicile Earned Claims Ratio MLR Lives

461 55026 BCBSM Inc MN 506,489,479 406,054,732 80% 86% 97,551

1258 95766 Healthpartners Inc MN 345,634,000 298,410,000 86% 93% 99,618

1552 12459 Medica Ins Co MN 205,535,267 171,496,997 83% 90% 23,249

1258 44547 Healthpartners Ins Co MN 80,231,000 70,962,000 88% 96% 18,196

3492 11817 PreferredOne Ins Co MN 55,514,574 52,238,085 94% 98% 17,657

7 13935 Federated Mut Ins Co MN 35,069,221 22,114,173 63% 74% 6,826

3492 95724 PreferredOne Comm Hlth Plan MN 33,666,623 31,975,379 95% 102% 4,545

19 69477 Time Ins Co WI 650,634 295,222 45% 59% 80

4751 14202 Gundersen Health Plan MN MN 459,812 303,857 66% 69% 193

19 65080 John Alden Life Ins Co WI 404,516 243,656 60% 71% 35

1246 95725 Sanford Health Plan of MN MN 393,171 304,919 78% 89% 102

Total

$1,264,048,297 $1,054,399,020 83% N/A $268,052

**Attachment 2 lists the loss ratios experienced in the small employer health plan market in 2014 by health plan companies that cover small

employer groups. Not all health plan companies with small employer health plans in force are included, as some had premium volume lower

than $300,000, which were not included. Also excluded are large employers with self-funded health plans.

An entity actively engaged in business (including political subdivisions of the state) that meets the following criteria is considered a small

employer group:

employed 2-50 workers who worked at least 20 hours per week on business days during the preceding calendar year; and

employs at least 2 current employees on the first day of the health plan year.

The state loss ratios for 2014 ranged from 45% to 95%. The total state loss ratio for 2014 for health plan companies is 83%. The total state

loss ratio for the previous year was 87%.

Values for the ACA MLR are marked above as preliminary because, due to the late timing of the 3Rs processing, carriers were forced to

estimate financial entries for each of the 3R programs.

Attachment 3***

Large Employer Group excluding self-insured employers Supplemental Health Care Exhibit for 2014

State Preliminary

Group NAIC

Premium Incurred Loss ACA Covered

Code Number Name Domicile Earned Claims Ratio MLR Lives

461 55026 BCBSM Inc MN 1,075,087,108 938,661,281 87% 91% 199,765

1552 12459 Medica Ins Co MN 656,309,682 573,602,271 87% 94% 141,723

1258 44547 Healthpartners Ins Co MN 610,651,000 493,332,000 81% 89% 284,981

1258 95766 Healthpartners Inc MN 287,804,000 235,487,000 82% 87% 44,132

3492 11817 PreferredOne Ins Co MN 86,108,980 75,651,539 88% 94% 22,232

1258 52628 Group Health Plan Inc MN 44,364,000 43,686,000 98% 102% 8,126

3492 95724 PreferredOne Comm Hlth Plan MN 23,634,951 20,340,642 86% 91% 6,375

461 95649 HMO dba Blue Plus MN 16,910,035 12,939,166 77% 83% 2,501

7 13935 Federated Mut Ins Co MN 15,645,173 11,972,472 77% 90% 4,337

901 67369 Cigna Health & Life Ins Co CT 5,664,318 5,000,089 88% 96% 2,057

1552 52626 Medica Health Plans MN 2,323,448 3,702,818 159% 229% 428

1246 95725 Sanford Health Plan of MN MN 1,396,532 1,054,209 75% 89% 195

Total

$2,825,899,227 $2,415,429,487 85% N/A $716852

***Attachment 3 lists the loss ratios experienced in the large employer health plan market in 2014 by health plan companies that cover large

employer groups. Not all health plan companies with large employer health plans in force are included, as some had premium volume lower

than $300,000, which were not included.

Large Employer Group means a person, firm, corporation, partnership, association, or other entity actively engaged in business in Minnesota,

including a political subdivision of the state, that employs more than 50 employees.

The state loss ratios for 2014 ranged from 77% to 159%. The total state loss ratio for 2014 for health plan companies is 85%. The total state

loss ratio for the previous year was 86%.

Values for the ACA MLR are marked above as preliminary because, due to the late timing of the 3Rs processing, carriers were forced to

estimate financial entries for each of the 3R programs.